The Currency Wars – No currency deal on the IMF front

Posted by Jack Crooks - Black Swan Capital

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FX Trading – All together now: GLO-BAL-IS-M

No currency deal on the IMF front this weekend; but really, did we expect anything more than dialogue?

What did seem to be decided upon was the need for more emerging economy representation on the global front … because the developed economies are running this global supertanker aground, of course. The IMF said:

“Stronger and even-handed surveillance to uncover vulnerabilities in large advanced economies is a priority …”

And Thailand’s Finance Minister – yep, Thailand – added this:

“The IMF is no longer the institution designed to look after the developing countries solely …

“Its role needs to be more broad-based, and it needs to realize that mistakes in the larger economies have global impact.”

[Note: it also needs to realize that valuable decisions in larger economies also have global impact. But enough of that thinking …]

Being a little guy, it’s rather empowering to cast blame upon the big guy. The US is the biggest of big guys … and with the limp-wristed way in which US “leaders” have steered America recently – financially and geopolitically – it has become rather popular to bring the country’s economic ills to light.

As this experiment called GLOBALISM is being tested, the US is atop the list of the punishable. 

The rest of the global leadership seems to think better oversight by these globalist institutions  is what’s needed to keep the US and similar developed powers in line. But what they fail to realize: these developed nations are needed to keep this globalism in line; emerging economies are nothing yet without the big guys. Without the US, for instance, such a worldwide effort to produce one giant, perfectly-balanced economic system would fall apart. [Of course, without China getting in the game we can say the same thing.  Thus, the moniker G-2 to describe the relationship that seems to be deteriorating quickly.]  

As it is now, though, US and developed economy leaders seem to agree that maintaining a global order is best done through an IMF … or World Bank … or some combination of organizations that dictate policy. From the IMF this weekend:

“Further action is urgently needed to reinforce the institution’s role and effectiveness as a global body for macro-financial surveillance and policy collaboration …”

We can’t help but think an IMF-like institution restricts countries from acting in their own best interest.  Of course that is true, and why the West is looking to use the IMF as a wedge to change China’s actions which we know are always in China’s best interest. It is a subjective game—best interest—that can never be codified by some institutional body.  No surprise here.  Point being there is no magic bullet. The carrot of persuasion must still be backed by the stick of verification.  For now, trade tariffs seem the only stick available to Western governments to counter China’s “best interests.”  

Some would argue that the reason for the foreign exchange tensions is that the current structure of the IMF et al has hindered smaller economies from acting in their own best interest, or enabling larger economies to act in ways that impede upon the best interest of smaller economies. It’s just that their solution to these tensions seems to be the wrong one.

Rather than further complicate the responsibility of the IMF and formal interconnectedness of national economies, just do away with the whole idea. Let all economies operate with their own interests in mind. And if you think that’s a recipe for chaos, consider this from Ayn Rand:

“When a man trades with others, he is counting — explicitly or implicitly — on their rationality, that is: on their ability to recognize the objective value of his work. (A trade based on any other premise is a con game or a fraud.) Thus, when a rational man pursues a goal in a free society, he does not place himself at the mercy of whims, the favors or the prejudices of others; he depends on nothing but his own effort: directly, by doing objectively valuable work — indirectly, through the objective evaluation of his own work by others.”

If only wishing could make it so!

interests defined by those who don’t have the market’s best interests in mind.  We get It seems this mindset would help to flush away the complexities – restrictions, corruption, waste, risk, etc. – of a tightly-coupled global economic system; but it won’t happen in the real world.  Instead we are stuck with a whole lot of messiness of self-corruption and manipulation of money and credit as the raw material where we operate.  It is a tightly coupled quasi-free market at best; it always has been but the “free” part seems to be receding fast of late and is a handy excuse for inept government policy posed as solution.

The idea of a global monetary system based on a national currency at the center—the US dollar—has always been flawed to a degree.  But it was a system that served the world well despite of those flaws.  Two things have changed to expose how weak the system is now: 1) The US has not been a responsible holder of world reserve currency status.  And over the past 10-years, the manipulation and use of the dollar as pure near- term policy tool in place of real economic reform has been staggeringly stupid, but politically expedient, and 2) The system was based on global economic and political dominance at the center; that is no more thanks to the success of globalization championed by the once totally dominant power—the US.  Thus, the success of the global system, warts and all, under US dollar hegemony, seems to be sowing its destruction.  

Our view before the IMF meeting and after has not changed.  It is this:  If China does not choose to act soon (given that it now shares dominant global system power), there will be a major global conflagration because the West must maintain some credibility and use its stick–a real trade war will flow from the current currency skirmish.  If the IMF can help convince China the ball is squarely in their court, and that playing the game is in their long-term best interests, that at least it has been of some use.  

Jack & JR
Black Swan Capital LLC